The Man Who Invented GDP

Like many powerful management tools, the idea to compile data on a nation’s output was born not as an academic theory but out of a pressing practical need — in this case, the need to manage Britain’s meager resources in the desperate early stages of World War II.

In a series of three articles published in The Times of London, Nov. 1939, economist John Maynard Keynes noted that in World War I, excessive money creation stemming from defense spending led to inflation, which greatly hurt the working classes. Can we avoid this in World War II? asked Keynes. We can. But how? First by calculating “the maximum current output we are capable of organizing from our resources” (i.e. GDP). Next, “by estimating how fast we can safely draw on our foreign reserves by importing more than we export” (i.e. Imports minus Exports). Next, by estimating the minimum necessary capital formation needed to maintain plant and buildings (Gross Capital Formation). Next, by estimating how much will be required by our war effort” (Public Defense Consumption). What is left is “the size of the cake which will be left for civilian consumption” [i.e. both personal and public]. Keynes recommended using taxation and compulsory saving to ensure that consumption spending did not exceed that ‘cake,’ so that demand-pull inflation should not emerge. Keynes’ little 1940 book How to Pay for the War provided some initial estimates for Britain, 1940 (building on data collected by Colin Clark):

Partly as a result of Keynes’ influence, Britain did finance World War II with relatively little inflation, far less than in World War I.

If management begins with measurement — how in the world did governments build economic policy without knowing GDP, before 1940? And why did not economists invent the GDP metric centuries before Keynes?

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8 comments

I like your question – how indeed was this done before Keynes? And why do we take the4 GDP for granted? And I’m coming back to your blog from time to time to see if someone posts an answer.

And how did a system designed to pay for war become the mandatory accounting system for the post WWII era. A measurement that recognizes only monetary exchanges regardless of how they came about, that encourages environmental destruction since a dead tree is more valuable than a living one – etc.

I like your question – how indeed was this done before Keynes? And why do we take the GDP for granted? And I’m coming back to your blog from time to time to see if someone posts an answer.

And how did a system designed to pay for war become the mandatory accounting system for the post WWII era. A measurement that recognizes only monetary exchanges regardless of how they came about, that encourages environmental destruction since a dead tree is more valuable than a living one – etc.

The best example is increases in rent and insurance. How can such 2 obvious cost items be “cheered” by GDP measures. A related question is why food and energy are not including in Core CPI. Then what is CPI?

Economics is completely misunderstand. Simple and observable Economic Laws that were once taught by economists such Ricardo and Walrus have seemingly been forgotten. The Law of Land Scarcity and Economic Proportions (land and labor rise and fall together) must be understood in order to sustain any economy.

I would argue that pro growth advocates (i.e. landlords) developed a system of accounting that supported their short-term without regards to economic value. In the short-term, it seemed to “work”, but that is not good enough. How about a theoretical system that profits by producing more education as opposed to more houses and cars, more diversity as opposed to monopoly of culture, art as opposed to science, and ultimately more free time as opposed to labor time.

That being said, a new economic theory does exist, but no one seems to want to learn it. I have studied and written about it in The New Game, A strategy to reinvent the American economy.

Rent is income to landlords. Insurance cost is income to insurance companies. GDP is value free (and thereby of no particular value to maximize or grow by policy) and equivalent to GDI (Income) differing only by Statistical Discrepancy. It makes a lot of sense as an aggregate measure used in economic calculations. It makes no sense to maximize or grow by policy. But then we have to agree on our values, such as how valuable National Security is, or even what is it in the first place? In US we pay an awful lot for it, so we must be valuing it pretty highly, though IMO we go about it the wrong way. Since we don’t agree on values, or how we should be doing things, we can’t get much farther than GDP without fundamental arguments. Though at first glance, GPI looks good. GDP served its purpose in minimizing inflation during WWII in Britain, proof of Keynes’ genius. The British valued freedom from the Third Reich without much question about that.

GPI – Genuine Progress Indicator is proposed replacement for GDP. It is inferred by Kuznets, Keynes Widows Cruse, Stiglitz, etc and embraced by the Green Movement. I have yet to find Post-Secondary Education embracing a formal GPI-based Accounting Method Discipline that can be deployed in the economy or Governmental/Business Sector Support.